What would Warren Buffet do?

July 31, 2023

“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Warren Buffett

Important perspective from the world’s foremost value investor. Last week, the market continued its winning ways only pausing, with a bit of retraction, on Thursday after the Federal Reserve made it official with the expected 25 basis point rise.

For the week, the S&P 500 rose .99%, the Dow Jones Industrial Average gained .50%, the Nasdaq was up 1.90, Russell 2000 up 1.36 and the FTSE 100 +.02 and the broader foreign market MSCI-EAFE gained .72%. The top 7 weight in the S&P 500 (in order: Apple, Microsoft, Amazon, Nvidia, Tesla, Alphabet Google, and Meta Facebook) continued to dominate but the broadening of the rally continued. The Bank of Japan tweaked its policy which caused a rise in the 10-year Treasury to the highest yield since 2014: 3.98%. The 2-year treasury yield fell to 4.883% slowly moving the yield curve closer.

Last week, several key numbers were reported on top of the expended interest rate rise, the inflation number continued to drop. Interestingly, the core excluding food and energy dropped another .10% from the previous month, but food and energy rose 4.1%. This supports the Fed’s caution that work still needs to be done if the target rate of 2% is to be achieved, quite possibly taking into late next year. Thursday’s second-quarter GDP report was stronger-than-expected (2.4% vs 2.3% expected) and still the market marched on.

The market bounced back from a lower finish on Thursday that had been triggered by a report about the previously mentioned Bank of Japan. Even after the Federal Reserve pushed interest rates to a 22-year high of between 5.25%-5.5% on Wednesday, investors seem to be increasingly on board with Chairman Jerome Powell’s view that “we do have a shot” at a soft landing for the economy, albeit with the caveats that “it is a long way from assured” and “we have a lot left to go to see that happen.”

Investors have more than just macroeconomic news to cheer on right now. With the second-quarter earnings season roughly halfway through, the corporate news has been very good, as well. Some 81% of companies in the S&P 500 have beaten earnings estimates, so far, better than the typical 77% beat rate, according to FactSet.

Friday’s data showed the Federal Reserve’s preferred inflation measure, the personal consumption expenditures index, eased in June on an annual basis to an almost two-year low. which was accompanied by a decline in jobless benefit claims last week, a jump in durable-goods orders last month, and the real-estate industry’s declaration that the housing recession is over. (However, with rising mortgage rates, it sounds like wishful thinking). All of this is translating into more optimism than previously seen during the current cycle. There seems to be some significant movement in money sitting on the sideline finally moving back in the market which could trigger continued market upside.

However, as I mentioned last week that July has become a winning month, August, the former leading month for stocks until recently, has become the underperformer.

So going forward, we do believe bonds are back, echoing the sentiments of Vanguard’s Global Head of Fixed Income Group Sara Devereux, stressing quality, which includes some well-chosen high yield bonds due to the fact the recent declines have flushed out the weaker sisters and left emerging companies with improving balance sheets who still have higher risk issues available. We will continue to exercise caution as we look for opportunities to put new money to work and as the inflation picture will persist in the coming quarters, those inflation sensitive assets should justify our confidence in them. Further, we are convinced the sweet spot in the market is the recovering mid-caps and small caps as their prices have suffered for the last 10 years. I recently read a quote that said Wall Street is the only business where people run from half price sales.

Mike